How Damages Are Calculated for Wrongful Discharge or Demotion in California
Introduction
As a California employer, understanding the rules for damages when a contract-based claim for wrongful discharge or demotion is brought against your business is key to managing risk, responding to claims, and preparing for negotiation or litigation.
What Damages Can an Employee Recover?
If a court finds you have breached an employment contract by discharging or demoting an employee, damages may include several components:
Back Pay: The earnings (including salary, wages, benefits, pay raises) the employee would have received from the date of termination or demotion up to trial. Courts include not just regular wages but benefits such as health coverage, pension, bonuses, and other compensation (Wise v. S. Pac. Co., 1 Cal.3d 600, 607).
Future Lost Earnings: The present cash value of wages and benefits the employee would have earned if their employment was reasonably certain to continue in the future. Determining this period depends on factors like the employee’s age, performance, desire to remain with your business, and the stability of your operations (Drzewiecki v. H & R Block, Inc., 24 Cal.App.3d 695, 705).
Other Economic Damages: If there are additional, proven losses caused by the breach—like lost stock options, retention bonuses, or promises tied to the contract—courts may include these as well, provided they are not speculative.
Wrongful Demotion: Where demotion is at issue, damages generally are calculated as the difference between the employee’s compensation before and after the demotion (Scott v. Pac. Gas & Elec. Co., 11 Cal.4th 454, 468).
How Is the Damage Period Determined?
Courts consider the employee’s age, health, track record, plans for ongoing employment, and your business prospects to decide how long employment would have lasted if not for the breach (Drzewiecki, 24 Cal.App.3d at 705).
Duty to Mitigate Damages
Employees have a duty to minimize financial losses after discharge or demotion. If comparable work was reasonably available and the employee failed to pursue or accept it, you may reduce damages. However, you must show that other work was substantially similar—not just any job (Parker v. Twentieth Century-Fox Film Corp., 3 Cal.3d 176, 181–82).
Practical Steps for Employers
Keep detailed records of pay, benefits, job performance, and communications with employees.
Prepare evidence of potential comparable employment to support mitigation arguments.
Document changes in business operations that might affect future employment prospects.
Consider these rules when determining severance or negotiating settlements in discharge or demotion situations.
Citations:
Parker v. Twentieth Century-Fox Film Corp., 3 Cal.3d 176, 181–82; Wise v. S. Pac. Co., 1 Cal.3d 600, 607; Drzewiecki v. H & R Block, Inc., 24 Cal.App.3d 695, 705; Scott v. Pac. Gas & Elec. Co., 11 Cal.4th 454, 468; CACI No. 2406.
